Credit Cards Newest Area of Potential Problems for Banks

Banks and credit cards

Banks have suffered through the recession with huge mortgage industry defaults, but a new fear that credit cards will do the same is looming. Ken Lewis, Bank of America CEO, stated he believes that despite the government’s $700 billion rescue program, it will be “an awful year” for credit cards and companies that issue them.

It’s estimated there are almost $76 billion in credit card loans, and more than half of that debt is held by Bank of America, JPMorgan Chase and Citigroup.

The charge-off rate

Already setting the stage for disaster is the banking industry’s estimate that their charge-off accounts have reached a historic high of 7.73 percent. Most experts anticipate that figure will increase, as the unemployment rate is still dangerously high. This rate is commonly accepted as the most accurate indicator of future losses in the banking, mortgage and credit card industries.

Analyst Mike Taiano believes that the charge-off rate could be higher than 10 percent by year’s end. “With the economy the way it is, most consumers are still struggling. … Though there are some indicators that we are through the recession, there is still a long way to go to recover,” he said.

Bracing for the loss

Unlike the recession of the ’80s, when unemployment rates ran high also, this generation brings its own set of problems. First, new proposed legislation is set to allow consumers to request their banks reduce their mortgage debt if they have filed bankruptcy. Experts are fearful that this will cause more people to file bankruptcy so they can default on credit cards and other outstanding debts.

On the brighter side

David Robertson, publisher of the Nilson Report, stated that it’s “encouraging” that banks are adept at maneuvering recessionary periods after “years of practice.” When facing credit card losses, they know what cautionary actions to take.

For example, banks are slashing limits already and raising interest rates to bring in as much revenue as possible. They are also working their customer service teams exceptionally hard, encouraging communication with customers. American Express is a leader in the mitigation process and recently offered their credit card holding customers a $300 cash-back return if they paid their account balances off and the closed their accounts before April.

Citibank

There is also news that Citibank is joining the ranks of a banks coming up with strategies to mitigate loss. The company is looking to work out a joint venture for its private credit card division that serves retailers, as a way of moving out of the credit card business altogether. However, experts say Citibank is alone in wanting to distance themselves from the credit card industry.

Most banks know they will have a difficult time attracting a completely new set of customers and would rather work hard to keep the ones they have, while easing their own risk. Stuart Gunn, director of Bridge Strategy Group, stated: “If you want to be the retail bank of choice, it means you have to have CDs, debit cards, home equity loans and credit cards. Do you really want to exit one of the major lines of business?”